Commercial Litigation and Arbitration

Fraudulent Joinder — Circuit Splits — “Fraudulent Joinder Has All the Clarity One Would Expect from a Legal Rule Fashioned Entirely from Judges’ Imaginations”

Murriel Don Coal Co. v. Aspen Ins. UK Ltd., 790 F. Supp. 2d 590 (E.D. Ky. 2011):

Admittedly, at the heart of fraudulent joinder is an understandable impulse: Plaintiffs should not be able to play games with federal jurisdiction. If a Kentucky plaintiff sues a New York insurance company, he should not be able to tether the case to state court by also including a frivolous claim against Rick Pitino for causing extreme emotional distress by failing to take the University of Louisville Cardinals past the first round of the NCAA tournament. But from the desire to prevent this kind of extreme abuse has sprung a judicially created doctrine that invites federal courts to exceed their jurisdiction. And the doctrine has also probably caused more trouble than benefits. Fraudulent joinder has all the clarity one would expect from a legal rule fashioned entirely from judges' imaginations. In the absence of guidance from the Supreme Court over the past ninety years, courts of appeals have splintered over critical questions such as the proper standard for judging the plaintiff's chances of success on his claim against the non-diverse defendant; whether courts are limited to examining the state court pleadings or whether they may (or must) consider extrinsic evidence such as affidavits and deposition transcripts; and whether courts should evaluate the plaintiff's claim using a standard akin to a motion to dismiss under Rule 12(b)(6) or something else. See Matthew J. Richardson, Clarifying and Limiting Fraudulent Joinder, 58 Fla. L. Rev. 119, 146-64 (2006) (detailing circuit splits); Underwood, supra, at 1045-85 (same).

There is a better way. Instead of exercising jurisdiction where none exists using a fractured, judicially created doctrine, why not allow the state courts to determine whether the claims against non-diverse defendants are valid? See 14B Charles Alan Wright & Arthur R. Miller, Federal Practice and Procedure § 3723 (4th ed.) ("In many situations, confusion could be reduced if removing parties would challenge fraudulent joinders and misjoinders in state court, before defendants file a removal notice."). If a claim against a non-diverse defendant is truly frivolous, surely the state court would grant a motion to dismiss the claim in relatively short order. Instead of requiring federal courts to venture their best guess at whether a state-law claim is colorable, it makes much more sense to leave the decision to the state courts, who are experts on questions of state law. See, e.g., Tafflin v. Levitt, 493 U.S. 455, 465, 110 S. Ct. 792, 107 L. Ed. 2d 887 (1990) (recognizing that "state courts presumably have greater expertise" at evaluating "violations of state law"); Davis v. Mich. Dep't of Treasury, 489 U.S. 803, 818, 109 S. Ct. 1500, 103 L. Ed. 2d 891 (1989) (recognizing that "question[s] of state law [are] within the special expertise of the [state] courts"). This approach would eliminate the unseemly practice of federal courts acting on claims over which they lack jurisdiction, thus preventing the federal judiciary from "poach[ing] upon the territory of a coordinate judicial system." B., Inc. v. Miller Brewing Co., 663 F.2d 545, 548 (5th Cir. 1981).

Leaving it to the state courts is not a novel approach. More than 130 years ago, the Supreme Court held that, for a defendant to remove a case from state to federal court, "[t]he record in the State court . . . should be in such a condition when the removal takes place as to show jurisdiction in the court to which it goes." Gold-Washing & Water Co. v. Keyes, 96 U.S. 199, 201, 24 L. Ed. 656 (1877). Applying this well established principle, this Court recently held in May v. Wal-Mart that a defendant may only remove a case to federal court if the record at the time of removal establishes that the amount in controversy more likely than not exceeds the $75,000 jurisdictional minimum. 751 F. Supp. 2d at 951. If it does not, the defendant may not use the federal court's authority to conduct discovery into the amount in controversy. Id. at 955. Instead, the defendant must return to state court and conduct discovery there. He may come back to federal court if he adduces sufficient evidence to establish that the amount in controversy more likely than not exceeds $75,000. Id. at 953. The same principles apply here, arguably with greater force. If complete diversity is lacking, the "record in the State court" is not "in such a condition when the removal takes place as to show jurisdiction in the" federal court. Keyes, 96 U.S. at 201. If it offends federalism for the federal court to retain jurisdiction to allow the parties to conduct limited jurisdictional discovery, see May, 751 F. Supp. 2d at 950-52, it is significantly more offensive for the federal court to dismiss a claim over which it lacks jurisdiction. The better course is for the court to remand the case and allow the state court to dismiss the claims against the non-diverse defendants if those claims truly present no hope of success. Once the state court dismisses the non-diverse defendants from the case, the remaining diverse defendants would have thirty days to file a notice of removal under 28 U.S.C. § 1446(b). See King v. Household Fin. Corp. II, 593 F. Supp. 2d 958, 960 n.2 (E.D. Ky. 2009).

For these reasons, fraudulent joinder makes little sense. It requires federal courts to exercise jurisdiction where none exists over questions of state law that the state courts are better suited to address themselves. Nevertheless, altering the fraudulent-joinder doctrine is a decision that is above this Court's pay grade. Fraudulent joinder is still the law of this circuit, and until the law changes, this Court will faithfully apply it.

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